The US dollar index has made another leg down, declining nearly 13% in 4 months, from the high of 99.37 on 9/3/03 to a low of 86.36 today. But people go merrily along, buying up stocks, with seemingly not a care in the world. Does the majority really believe this is of no consequence, or even beneficial? Or are stocks being inflated in price to compensate for the decline in the dollar, in which they are denominated?
Remember the US economy is 90% internally oriented. So the fall of the dollar may not have a significant impact on US GDP as it would for any other country. So it is natural to have weak currency and rising market here in US. Look at charts of 1999. Besides energy makes up only 2% of US GDP, so the rise in oil prices is not affecting the economy as it did even 10 years ago.
There have been periods where a falling dollar and rising stock market coincided, most memorably 1987. Many companies benefit from a falling dollar, at least in the short run, typically those with a lot of foreign earnings. A weak dollar also pressures foreign competitors, such as auto manufacturers, to produce here so that most of their expenses are also in dollars. The inflationary aspects of the weakening dollar have been masked by worldwide overcapacity and China's extremely low costs. I continue to believe the Bush administration is pursuing a weaker dollar policy in part as payback to the Europeans for certain trade disputes that have gone against us at the WTO. Personally, I think it is playing with fire, but maybe they know what they're doing.
A weaker dollars have some advantages as it is a natural defense against stranger products for which you don't have to put duty on them, but if the USA are a 90% inside consummer they are also a big external consumer, many products are not build in the USA, this will cause inflation (Greenspan want inflation in the moment ...). Also, a weaker dollars is more competitive for to export, and for many Dow corporations, this is a good news, because their non-US part will be more profitable in their books, because external devise will be more valuable, check that many corp. will announce a better yield related to their non-US activities. The main problem is that the Euro is becoming the new standard and this is not a problem for them because they buy frequently outside European zone, but a strong devise drive stock market and this could be a big challenge in near future for US Stock. Don't forget, you can control the drop of the dollars, but the converse is not true and usually the way is long for to recover the position ...
Hey tripleA, how ya been? Interesting point. But what was the eventual result of '87? In the long run, the weak dollar is a disaster for the US, in the short run it'll probably help W get relected, and somewhere in there I'd guess the stocks will probably decline somewhat (20%ish).
And didn't the quick decline in the dollar occur just before the 87 crash? Is the market in trouble? Are all the ''improved'' earnings do to cost reductions?
Why the hell should it matter? Price goes up, price goes down. Bull market, bear market, wash rinse repeat. If you're really concerned, buy some eurodollar futs to hedge.
I agree with most of the points raised by others previously on this thread. In the short term (for example, in 2001 to 2003), the decline in the US Dollar is incredibly good for the US stockmarket. However, eventually (I'm thinking either 2004 or 2005), the decline will accelerate significantly, caused by and/or leading to selling of US Dollar denominated assets, especially US Treasuries. When that happens, the stockmarket fall in inflation-adjusted terms, if not in nominal terms. US residents should take a leaf out of Harris' book and start buying some physical gold to protect themselves.